Correct Option
The correct option is Creation of black markets..
Explanation
A price ceiling is a government-imposed maximum price limit set below the market equilibrium price to ensure affordability. Rationing is a complementary administrative measure used to distribute the limited supply of goods when the market price mechanism is suspended.Analysis of Consequences
- Market Imbalance: When a price ceiling is effective (set below equilibrium), the quantity demanded by consumers increases due to the lower price, while the quantity supplied by producers decreases. This creates excess demand or a shortage in the market.
- Emergence of Black Markets: Due to the shortage, many consumers are unable to purchase the good at the controlled price despite rationing efforts. Since there are consumers willing to pay more than the legal ceiling to secure the good, illegal trading channels emerge. In these black markets, goods are sold at prices significantly higher than the controlled rate.
- Why other options are incorrect:
- Excess supply of goods in fair price shops. Excess supply: Price ceilings cause shortages (excess demand), not excess supply. Excess supply occurs when prices are set above equilibrium (price floor).
- Increase in the equilibrium price of the good. Increase in equilibrium price: The equilibrium price is a theoretical point where supply meets demand. While the black market price rises, the intervention itself prevents the legal market from reaching equilibrium.
- Decrease in the demand for the good. Decrease in demand: According to the Law of Demand, a lower price increases the quantity demanded; it does not decrease it.
Key Takeaway
The primary economic consequences of a binding price ceiling are shortages (excess demand) and the subsequent formation of black markets, where goods are traded illegally at prices higher than the government-mandated limit.